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Kaupthing Bank Quarterly Results

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Interim Financial Statements 1 January - 30 September 2012 Unaudited Arion Bank Borgartún 19 105 Reykjavík Iceland Reg. no. 581008 - 0150 Contents page page Endorsement and Statement by the Board of Directors and the CEO .................................................................. 3-4 Interim Statement of Changes in Equity ..................................... 7 Interim Statement of Comprehensive Income ......................... 5 Condensed Interim Statement of Cash Flows ........................... 8 Interim Statement of Financial Position ..................................... 6 Notes to the Interim Financial Statements ................................ 9-44 Arion Bank Interim Financial Statements 30 September 2012 ______________________________________________________ 2 _____________________________________________________ Endorsement and Statement by the Board of Directors and the CEO The Interim Financial Statements of Arion Bank for the period ended 30 September 2012 include the Interim Financial Statements of Arion Bank ("the Bank") and its subsidiaries, together referred to as "the Group". Arion Bank is a group of financial undertakings which provide comprehensive financial services to companies, institutions and private customers. These services include corporate banking, retail banking, investment banking and asset management and comprehensive wealth management for private banking clients. Kaupskil ehf., a company owned by Kaupthing hf. (formerly Kaupthing Bank hf.), holds 87% of the shares in Arion Bank. The remaining shareholding of 13% is held by Icelandic State Financial Investments on behalf of the Icelandic government. Operations during the period Net earnings amounted to ISK 14,537 million for the period ended 30 September 2012. Total equity amounted to ISK 128,432 million at the end of the period, including share capital amounting to ISK 2,000 million. The capital adequacy ratio of the Group, calculated according to the Act on Financial Undertakings, was 22.5%. By law this ratio is required to be no lower than 8.0%, but the Icelandic Financial Supervisory Authority ("FME") requires it to be no less than 16%. The Group’s liquidity position was strong with the liquidity ratio and cash ratio being 31% and 18% respectively at the end of the period. This compares favourably with the regulatory minimum of 20% and 6% respectively. Arion Bank generally performed well during the period and core banking activities continued to yield strong results. The same applied to core subsidiaries. Deposits in domestic banks have declined gradually and are expected to continue to do so in the near future, the main drivers being new investment opportunities for individuals and institutional investors. Arion Bank is fully aware of this trend and continues to strengthen and diversify its funding base. To that effect, the Bank, on 17 February, issued its first covered bonds under its EUR 1 billion Covered Bond Programme. The issue was ISK 2.5 billion index-linked, with a final maturity in 2034, targeted towards Icelandic institutional investors. Arion Bank was also the first Icelandic bank to issue fixed rate, non index-linked, covered bonds. In May and June the Bank issued a total of ISK 2.5 billion 6.5% fixed rate covered bonds maturing in 2015. In April the Icelandic rating agency Reitun ehf. published its B+ rating of Arion Bank's senior unsecured bonds issuance. This rating is two notches below the rating of the Republic of Iceland. The Agency furthermore issued a rating of A to Arion Bank's covered bond issuance, which is at par with the rating of the Republic of Iceland. The Bank has placed emphasis on selling its shareholding in legal entities which were acquired as a result of a foreclosure. During the first two quarters of the year the Bank sold a large part of its shareholding in Hagar hf. or 15.7% effective share. The remaining shareholding in Hagar is classified as a trading asset. After receiving the approvals of the Icelandic Competition Authority the sale of B.M. Vallá ehf. was finalized in May, the sale of 38.9% share in N1 hf. in June and the sale of Penninn á Íslandi ehf. in August. In June the Bank sold its 20% shareholding in Ölgerdin Egill Skallagrímsson ehf. and in July a Finnish subsidiary of Fram Foods ehf., Boyfood OY was sold. Progress has been made toward simplifying the Group structure by merging subsidiaries into the Bank and by liquidating several subsidiaries. The main entities merged into the Bank were Verdis ehf. and Sparisjódur Ólafsfjardar, both wholly owned by the bank. The quality of the Bank‘s balance sheet continues to improve. The recovery work on loans to larger corporations is largely completed and work continues with SME‘s and individuals. On 15 February 2012, the Supreme Court passed a judgment regarding interest on FX linked loans, adding uncertainty regarding the book value of foreign currency lending. The ruling was not decisive enough for all disputed aspects of FX loans and further clarification from Court rulings was deemed necessary. Recent rulings have significantly reduced the uncertainties related to the February judgment and the Group has announced that certain currency-linked loans will be recalculated. Further discussion about the legality of foreign currency loans is contained in Note 52. On 6 November the FME published its conclusions concerning a valuation of Arion Bank's loan book. The sample used in the valuation was 43% of the corporate loans, and the main findings were that there is no indication of any overvaluation of the Bank's loan book. There continue to be positive signs in the Icelandic economy which is forecasted to grow by 2.7% this year. A number of the Group's customers have experienced growth in their operations, a trend underlined in the Bank's marketing. A key step in customer interface was taken by the Bank when the Arion App was launched in August and in September motor financing was added to the product portfolio. The Group has performed strongly. It has been able to attract existing pension funds to its asset management services as well as to add valuable customers to the corporate loan book. The primary focus in investment banking activities has until recently been on selling assets held by the Group but now when this assignment is coming to an end the focus has shifted to customer originated projects which are at different stages in their process. Arion Bank Interim Financial Statements 30 September 2012 ______________________________________________________ 3 _____________________________________________________ Endorsement and Statement by the Board of Directors and the CEO Statement by the Board of Directors and the CEO The Interim Financial Statements for the period ended 30 September 2012 have been prepared in accordance with International Financial Reporting Standard (IAS 34 Interim Financial Reporting ) as adopted by the EU. It is our opinion that the Interim Financial Statements give a true and fair view of the financial performance of the Group for the period ended 30 September 2012, its financial position as at 30 September 2012 and its cash flows for the period ended 30 September 2012. Further, in our opinion the Interim Financial Statements and the Endorsement of the Board of Directors and the CEO give a true and fair view of the development and performance of the Group's operations and its position and describes the principal risks and uncertainties faced by the Group. The Board of Directors and the CEO have today discussed the Interim Financial Statements of Arion Bank for the period ended 30 September 2012 and confirm them by means of their signatures. Reykjavík, 28 November 2012 Board of Directors Monica Caneman Chairman Agnar Kofoed-Hansen Gudrún Johnsen Måns Höglund Freyr Thórdarson Jón G. Briem Chief Executive Officer Höskuldur H. Ólafsson Arion Bank Interim Financial Statements 30 September 2012 ______________________________________________________ 4 _____________________________________________________ Interim Statement of Comprehensive Income for the Period from 1 January to 30 September 2012 Notes 2012 2011 2012 2011 1.1.-30.9. 1.1.-30.9. 1.7.-30.9. 1.7.-30.9. Interest income ......................................................................................................................... 43,463 34,672 11,310 11,052 Interest expense ....................................................................................................................... (23,329) (17,836) (5,056) (5,376) Net interest income....................................................................................................... 12 20,134 16,836 6,254 5,676 Increase in book value of loans and receivables .............................................................. 13 8,073 29,795 905 457 Impairment of loans and receivables ................................................................................. 14 (7,594) (6,443) (2,958) (642) Changes in compensation instrument ............................................................................... 15 - (19,593) - - Net interest income less valuation changes on loans and receivables.................... 20,613 20,595 4,201 5,491 Fee and commission income ................................................................................................. 12,089 12,300 4,121 3,921 Fee and commission expense ............................................................................................... (4,036) (4,726) (1,406) (1,446) Net fee and commission income.................................................................................
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